Sonida Senior Living Inc (SNDA) 2016 Q1 法說會逐字稿

Good day, and welcome to the Capital Senior Living First Quarter 2016 Earnings Release Conference Call. Today's call is being recorded. The forward-looking statements in this release are subject to certain risks and uncertainties that could cause results to differ materially, including but not without limitation to the Company's ability to find suitable acquisition properties at favorable terms, financing, licensing, business conditions, risks of downturns in economic conditions generally, satisfaction of closing conditions such as those pertaining to licensure, availability of insurance at commercially reasonable rates, and changes in accounting principles and interpretations among others, and other risks and factors identified from time to time in our reports filed with the Securities and Exchange Commission. Now, at this time I would like to turn the call over to Mr. Larry Cohen. Please go ahead, sir.

Thank you. Good afternoon, and welcome to Capital Senior Living's First Quarter 2016 Earnings Release Conference Call. I want to thank our strong team of employees at Capital Senior Living communities across the country for providing our residents with exceptional service and care. I am extremely proud of the team's hard work and dedication. It is our talented employees that give us such great confidence in the future of our Company in the continued quality care we provide our residents and the long-term value we are creating for all of our stockholders and other stakeholders.

Our strong first quarter 2016 results demonstrates the advantages of our clear and differentiated strategy to drive superior shareholder value as we successfully execute on our multiple avenues of growth. Our focused execution of our strategic plan produced solid growth in all of our key metrics in the first quarter as compared to the prior year, including revenue, occupancy, average monthly rent, NOI, adjusted EBITDAR, and adjusted CFFO. Our occupancy gains continue to outpace the industry with same community occupancy increasing 110 basis points since the first quarter of 2015. As expected, sequential occupancy decreased in the first quarter due to the lag effect of decreasing occupancy in the fourth quarter of 2015. With a mild flu season and better weather during the first quarter 2016, we gained 75 same community net move-ins for the period beginning with the week ended January 1 through April 1, 2016. This is a 115-unit improvement in same community occupancy compared to the comparable period in the prior year. Our strong occupancy growth is resulting in pricing power with an approximately 3.5% increase in same community revenue on the like number of units basis as compared to the first quarter of the prior year, reflecting the price increases we implemented this past fall and again in January of this year. And our disciplined expense management programs limited same community expense growth to 1.4%, increasing same community net operating income by an exceptional 5.8% on a like number of unit basis for the first quarter of 2015.

Our better than expected first quarter results enhanced our outlook for the rest of 2016. Our conversions of independent living units to assisted living and memory care units also continue to show timely progress. Our strong first quarter results reflect the successful implementation of various initiatives that increase shareholder value both in the near term and in the long term, including occasional introductory specials at lower occupied communities, increasing rates at higher occupancy communities, increasing level of care charges and disciplined proactive expense management. We are also benefiting from the cash flow and value-enhancing renovations, refurbishments and conversions of units to higher levels of care that are in process in more than 60% of our communities. They are resulting in exceptional increases in occupancy and revenues. These renovations, refurbishments and conversions are scheduled for the first half of 2017 and should lead to further improvements in our operating and financial results. And the transformation of our sales and marketing strategies is also yielding positive results.

As we have discussed on previous calls, senior housing construction remains concentrated in select markets, and our superior results demonstrate that competitive new supply remains limited in our local markets due to low investment returns. With our average monthly rate of $3,443, and average construction costs of approximately $200,000 per unit, the return on investment on the newly built community at 90% occupancy would be about 5.5%. This low return on cost is an economic barrier that limits competitive new supply in most of our local markets. In fact, the only market that I am aware of that meaningful competitive new supply is in the McKinney-Plano-Allen-Frisco submarket in North Dallas, which represents less than 2% of our portfolio and in which we compete very well.

As someone who personally survived the overbuilding that the senior living industry faced in the late 1990s, I can state with confidence that we are not concerned about supply derailing Capital Senior Living's bright growth trajectory. With strong industry fundamentals and improving economy and housing market, limited competitive new supply in our local markets, and the gains we are recognizing from our unit conversions, community renovations and refurbishments, we believe that our occupancies can grow to an optimal level of 92% to 93%, delivering significant organically driven CFFO growth and increases in the long-term value we are creating in our owned real estate and for our shareholders. Every 1% improvement in occupancy is expected to generate $4 million of revenue, $2.8 million of EBITDAR, and $0.06 per share of CFFO.

Another compelling strategy to drive superior shareholder value is our accretive acquisitions. In the first quarter of 2016, we completed the acquisition of five senior living communities for a combined purchase price of approximately $64.4 million. These acquisitions expand our operations in Wisconsin and Florida, and are expected to generate incremental annual CFFO of approximately $0.10 per share. Acquisitions of three additional communities totaling approximately $74 million are expected to close during the second quarter of 2016, subject to completion of due diligence and customary closing conditions, which will bring our total acquisitions in the first half of 2016 to approximately $138.4 million. And we have a strong pipeline of near to medium term targets.

In the first quarter we signed confidentiality agreements covering 41 properties with an estimated value of $780 million. We will be very selective in determining which of those we would like to own. Our disciplined and strategic acquisition program is self-funded from internally generated cash. In nearly five years we purchased 57 communities for a combined price of approximately $803 million and prudently financed them with long-term, fixed rate, nonrecourse mortgages with a 2.7 interest expense coverage ratio. These acquisitions have generated better than a 16% cash-on-cash return on equity and first year CFFO of $1.23 per share.

Our success in acquiring high-performing communities in off-market nonbroker transactions and attractive terms validates our differentiated competitive advantage as a highly regarded and credible owner-operator with a financial ability to complete transactions. As our cash flow grows and our liquidity improves, our robust pipeline allows us to continue our disciplined and strategic acquisition program that increases our ownership of high quality senior living communities in geographically concentrated regions, and generates additional significant increases in EBITDAR, CFFO, real estate value and shareholder value.

As the capital markets have tightened and become more volatile, the healthcare REITs and other public companies are reducing their allocation of capital to senior living acquisitions. Capital Senior Living is in an excellent position to benefit from this dislocation in the market as our differentiated investment strategy allows us to fund our growth of internal sources without ranking equity or accessing the capital markets. And for our shareholders, we offer a more cost efficient investment vehicle with our first quarter G&A of only 4.9% of revenues compared to a REIT that is paying a management fee of 5% of revenues in addition to its own G&A averaging 3.8% of revenues.

We have been proactive in enhancing the quality of our portfolio, increasing our substantially all private pay revenues and improving our balance sheet. We closed the only skilled nursing beds we had operated in two continuing care retirement communities that are presently being repositioned. We sold five older, nonstrategic communities and recycled approximately $26 million of cash into accretive acquisitions of newer, high-performing communities within our geographically concentrated regions. These sales also eliminated our operations in three states, which have allowed us to sharpen our strategic focus and strengthen our operations in our geographically concentrated regions. These actions have improved our key operating metrics including our best-in-class EBITDAR margins.

We also continue to take advantage of the appreciation in the real estate value of our wholly owned communities through attractive nonrecourse, fixed rate, long-term refinancings and supplemental financing at historically low interest rates, which have extended our mortgage maturities and increased our cash balances. We have a very clear and differentiated strategy and benefit from larger company competitive advantages in a highly fragmented industry. Approximately 70% of the senior living operators in the United States are mom and pops. Most senior living operators are not well capitalized as they serve as a fee manager for a third-party owner or as a tenant under a triple net lease with minimal coverage and escalating lease payments. In contrast, Capital Senior Living wholly owns more than 60% of our communities, which is the highest percentage of wholly owned communities among the nation's top senior living operators. Our differentiated investment strategy of owning our communities creates significant real estate value and generates sustainable cash flow, which we are investing in people, training, technology, systems, renovations, refurbishments, conversions of units to higher levels of care and accretive acquisitions while maintaining prudent reserves. Our commitment to our most valuable resource are people, limited turnover and strengthened resident satisfaction and length of stay. And our dominant competitive position in our highly fragmented local markets is a catalyst for further aggregation of smaller operators with limited resources as well as an effective deterrent to possible new competitors.

Capital Senior Living is transformed and improving. Our track record is proven. We are attractively positioned to drive superior shareholder value as a larger company with scale, competitive advantages, and a substantially all private pay business model in a highly fragmented industry that benefits from long-term demographics, need-driven demand, limited competitive new supply in our local markets, a strong housing market, and a growing economy. It is my pleasure to now introduce Carey Hendrickson, our chief financial officer, to review the Company's financial results for the first quarter of 2016.

Thank you, Larry, and good afternoon, everyone. I hope you have had a chance to review today's press release. If not, it's available on our website at www.capitalsenior.com. You can also sign up on our website to receive future press releases by email, if you would like to do so.

The Company reported total consolidated revenue of $109.2 million for the first quarter of 2016. This is an increase of $10.5 million, or 10.7% over the first quarter of 2015. Increase in revenue is largely due to acquisitions the Company made during or after the first quarter of 2015 net of dispositions. During that time we have acquired 14 communities including 5 communities that we purchased during the first quarter of 2016, and have disposed of 5 nonstrategic communities. Including the revenue of the 5 communities we've sold during or since the first quarter of 2015 from all appropriate periods, revenues increased $12 million, or 12.3% in the first quarter of 2016 as compared to the first quarter of the prior year.

Revenue for consolidated communities excluding the three communities that are undergoing repositioning, leased up or significant renovation and conversion increased 10.7% in the first quarter of 2016 as compared to the first quarter of 2015. It is important to note that this 10.7% increase was achieved with fewer units available for lease in the first quarter of 2016 than the first quarter of 2015, exclusive of acquisitions, due to conversion and renovation projects that are currently in progress at certain communities.

Our net operating income for these communities increased 11.7% in the first quarter of 2016 as compared to the first quarter of 2015. These results clearly illustrate the effectiveness of our strategy to acquire high-performing communities and strong markets, dispose of nonstrategic underperforming communities, and to convert units in our existing communities to high levels of care while continuing to proactively manage our expenses. Our operating expenses increased $5.7 million in the first quarter of 2016 to $62.3 million due primarily to the acquisitions.

Our general and administrative expenses for the first quarter of 2016 were $800,000 higher than the first quarter of 2015 after excluding transaction and other one-time costs for both years, and that was due mostly to a $700,000 increase in medical claims expense. Medical claims were higher than usual in January and February, but returned to a more normal level in March, and you'll remember that our medical claims expense in the fourth quarter of 2015 were lighter than usual.

Excluding transaction and other one-time costs, G&A expenses as a percentage of revenue under management were 4.9% in the first quarter of 2016. As we noted in the release, the Company's non-GAAP and statistical measures exclude three communities that are undergoing repositioning, lease-up of higher licensed units or significant renovation and conversion.

Adjusted EBITDAR was $37.3 million in the first quarter of 2016, an increase of $3.2 million, or 9.3% from the first quarter of 2015. This does not include EBITDAR of another $800,000 that is related to the three communities that are undergoing repositioning, leased-up or significant renovation and conversion. The Company's adjusted EBITDAR margin in the first quarter of 2016 was 35.6%.

Our adjusted CFFO was $11.7 million in the first quarter of 2016, which was an increase of 11% from $10.5 million in the first quarter of 2015. On a per-share basis, CFFO was $0.41 compared to $0.37 in the first quarter of 2015. The contribution to CFFO from communities acquired during or since the first quarter of last year was $0.08, which is $0.01 ahead of our expectations in public announcements related to these communities.

On a same community basis, our revenue increased $2.2 million, or 2.3% over the first quarter of the prior year. However, as noted previously, due to conversion and refurbishment projects currently in progress at certain communities, there were fewer units available for lease in the first quarter of this year than the first quarter of last year, 120 less units on a same-store basis. With the like number of units available in both years, same community revenue would have increased approximately 3.5% versus the first quarter of the prior year.

Our same community expenses increased only 1.4% in the first quarter of 2016 versus the first quarter of last year. Labor costs including benefits increased 2.8%. You will remember the first quarter of 2016 had an extra day as compared to the first quarter of 2015 due to leap day in February. So, adjusting for that extra day of labor costs, our labor costs increased approximately 2.2%. Food cost increased 0.9%, our utilities cost decreased 9% due to milder weather in the first quarter of 2016 versus the first quarter of 2015.

Our same community net operating income increased 3.7% in the first quarter of 2016 as compared to the first quarter of 2015. However, with a light number of units available in both years, same community net operating income would have increased approximately 5.8% in the first quarter of last year. Same community occupancy was 88.5% in the first quarter of 2016, which was an increase of 110 basis points versus the first quarter of last year. Our same community average monthly rent was up 2.3% versus the first quarter of 2015. For our consolidated communities, average monthly rent was up 4.6%, and our consolidated occupancy increased 130 basis points versus the first quarter of 2015. The improvement in our consolidated metrics versus the first quarter of last year reflects our sale of the five nonstrategic communities in 2016 and our accretive acquisition of high occupancy communities with higher rents.

We also continue to make steady progress on the conversion of independent living units to higher levels of care. Based on our first quarter of 2016 results, the annualized impact of the first phase of 400 units converted to a higher level of care that were completed by midyear 2015 is currently approximately $0.08 of CFFO, with a contribution expected to grow through the year.

Further, the impact of this first phase of 400 conversions of occupancy revenue and NOI is outstanding and very much in line with our initial expectations. On a combined basis, occupancy of these communities has grown from 82.4% prior to conversion to 89.5% at March 31, 2016. Revenue at these communities increased 13% in the first quarter of 2016 as compared to the first quarter of 2015, while net operating income at these communities increased 17.2%.

We completed another 100 conversions by the end of 2015, and we are now in the process of leasing those units out. We are also making steady progress on an additional 200 conversions that we expect to complete by the end of 2016, with a majority of those expected to be completed in the second half of the year. And additional conversions at other properties are under consideration.

Looking briefly at the balance sheet, we ended the quarter with $45 million of cash and cash equivalents including restricted cash, which is a decrease of $24.2 million since December 31, 2015. We invested $18.1 million of cash as equity to complete the acquisitions of five communities, and we spent $13.8 million on capital improvements during the first quarter. $13.8 million of capital expenditures includes $2.3 million related to lease incentives for certain tenant leasehold improvements for which we expect to receive reimbursement from our lessors. We received reimbursements of approximately $900,000 in the first quarter and expect to continue to receive reimbursements as these projects are completed.

Our mortgage debt balance at December 31, 2016 was $818.3 million, at a weighted average interest rate of approximately 4.6%. We added approximately $46.3 million of debt in the first quarter related to the five communities that we acquired. At March 31, all of our debt was at fixed rates except for one bridge loan that totaled $11.8 million. The average duration of our debt is greater than 8 years and 98% of our debt matures in 2021 and after.

Looking at our expectations for the second quarter, we expect strong sequential growth in the first quarter to the second quarter in our various metrics, including CFFO. We expect the communities that we acquired in the first quarter to contribute an additional $0.01 to our second quarter CFFO. And even though utilities were considerably lower than usual in the first quarter, we still expect to pick up about $0.01 in CFFO from lower utilities in the second quarter, which is generally the mildest quarter of weather of the year. We also expect our second quarter G&A expenses to be approximately $300,000 less in the first quarter, adding another $0.01 to CFFO, mostly due to more moderate medical claims expense.

And, finally, we currently expect our core operations to add $0.02 to $0.03 in the second quarter as compared to the first quarter mostly associated with expected increases in occupancy and rate, and additional contributions from our conversions. Normally in the second quarter we would have a $500,000 increase in expenses associated with an additional day of operations, but that's not the case this year due to the leap day that we had in the first quarter. And, also, just as note, we expect to close on the $74 million in acquisitions on which we are currently completing our due diligence late in the second quarter or perhaps even early in the third quarter. So, we expect the benefit from those acquisitions to begin in the third quarter. That concludes our formal remarks and we would now like to open the call for questions.

(Operator Instructions) And our first question will come from Chad Vanacore with Stifel.

Just thinking about the new acquisitions, can you give us a little more color and accretion on those acquisitions, maybe average monthly rent and asset mix versus your current portfolio mix?

The acquisitions that we made in the quarter are predominantly assisted living and memory care. Their average rents, $3,850, which is a little higher than our average. Obviously, they have good occupancy, although as we said, the occupancy is, typically as these properties are coming in around 90% occupied with margins in the high 30% range, which is a little lower than our average margin, which is closer to 40% to 41%. That's before corporate overhead, Chad.

Okay. And then what do you think the CFFO contribution is annually?

$2.9 million or $0.10 per share. That's in the press release.

Oh, I was talking about the 2Q acquisition.

Oh, Q2, $74 million, we typically don't say that. But, again, I would say that we've been so consistent on our acquisitions, you could probably assume that $74 million would be a little higher than the $0.10 that we're getting from the $64 million. You can probably extrapolate from that another $10 million of acquisitions would be another, call it 15%, so it's probably $0.11, $0.12 per share of CFFO.

And we'll give full details on that (inaudible) --

The other thing I would mention, Chad, on the acquisitions, you see that the acquisitions in the first quarter, the average fixed rate was 4.4% on 10-year debt. We continue to expand our lender base, and life companies have really been very desirous to do business with us. We will report on these acquisitions our first 15-year term fixed rate nonrecourse debt in a low 4% range. That's already been fixed. That's already an agreed-to term with the lender. So, we're very excited that our financing continues to improve with more competition, with lower rates and longer terms.

And you had been doing fixed debt somewhere around 4.5% for 10 years; is that right?

In the first quarter if came in about 4.4%; right now 10-year debt would be around 4% to 4.25%, somewhere in that range. You know, 10 years come down to about the 180 level, but our spreads have narrowed because of the competition with our lenders.

All right, sounds good. And then just thinking about your pipeline, Larry, I believe last quarter you felt that transactions were slowing down. It seems that you're seeing actually a greater deal flow now. Can you talk about that and maybe how cap rates have changed, if they have?

You know, deal flow has been very, very strong. There have been no -- I'm not aware of any portfolio transactions for this industry for a couple of quarters, so the largest transactions have slowed down. Again, we've been focused on the onesies, twosies, we prefer that. If you look at kind of what we're seeing, we're seeing more transactions that are being marketed. I will tell you that in the first quarter I mentioned the number of properties that we have signed confidentiality agreements for; those are 18 transactions. About 25% are off-market; the balance are marketed transactions. We have lost offers. I mean, the market has not changed much on cap rates. We're buying higher quality properties, so our price per unit may be increasing because we're buying in larger markets and typically newer, higher quality properties. We are still generating about a 16% cash-on-cash return on the equity.

The competition that we're seeing is typically not for larger REITs, you know, they're just not looking at senior housing. There is some private equity out there that is buying some properties, but we have -- and our pipeline, we have a lot of repeat sellers who we've successfully transacted. We've had three properties purchased recently from one seller. They have come to us with another property. We know of three or four properties from another seller we dealt with. So, we're fortunate that we have a good repertoire, if you will, product that continues to come through from sellers that have enjoyed the experience with Capital Senior Living. More importantly, they are really impressed with the quality of our management and the tenure of our staff, that they feel very comfortable in trusting their residents with our management.

All right. And then just one more. Just looking at labor costs, it looks like on a same store basis, labor costs were only up 2.8%. That seems to be right down the pipe from what would be 2.5%, 3% average, historical labor inflation. Should we expect that to creep up during the year?

You know, Chad, I really think we're going to probably stay in the 2%, 2.5% range. As you said, it was 2.8%, but if you take out the extra day it's 2.2% in the first quarter. And over the last several quarters, the fourth quarter was 4%, but that was related to some items specific to the fourth quarter that we talked about, a credit and workers' comp that was in the fourth quarter the previous year, greater number of people added to our healthcare plan. And then an increase in costs to cover shifts over Christmas holidays. But before that, our labor costs were up 0.8% in the third quarter of 2015, 0.6% in the second quarter of 2015, 1.4% in the first quarter of 2015. So, very moderate increases, and, again, this quarter it's 2.2%. So, I think we feel comfortable that we can keep those labor costs between, you know, right around that 2.5% mark this year.

All right. Thanks, Carey. I'll hop back in the queue.

And next our question will come from Joanna Gajuk from Bank of America Merrill Lynch.

First, on the quarter, which I guess CFFO of $0.41, but it seemed about, I guess, what you were kind of guiding to, so can you walk us through the main drivers for the results coming better than expected? Were there occupants, pricing or costs or anything else how you kind of see the quarter versus your expectations?

It really was pretty well balanced. We had greater revenue than we expected. Our rate was very good, and occupancy was right about where we expected it to be. Expenses were less. We did have the really good utilities costs that came in in the first quarter. The $0.41 is even with our G&A costs being up, taking about $0.02 of our G&A away. So, it would have been even higher had we had kind of normalized medical costs, but that did bump up our G&A. It was pretty well evenly split between revenue and expense, from what we expected going into the quarter to where we ended.

So, it sounds like, I guess that's (inaudible). Also, when you talk about the elements for next quarter, so that kind of suggests like a 12% sequential increase in CFFO or $0.05 to $0.06. Is that the right amount?

That's what we expect currently going into the second quarter.

So, would you characterize it as similar to what you just mentioned was Q1 performance in terms of you having good traction on controlling costs while your occupancy and pricing growing nicely, so you had the spread in current driving the results?

Yes, I do. I think occupancy is going to -- we're well positioned for occupancy growth in the second quarter, and then our rates are also well positioned. I think we're going to be in good shape on the revenue side, and then expenses, our operating team does a great job of managing those costs and very disciplined. I think both of those things are going to contribute to the growth.

I'll just comment that we have in town for three days all of our regional operations and marketing staff. Carey and I spoke with them this afternoon. Most of them have been with our Company for quite a while, and I will tell you, we had lunch with everybody. Everyone is very positive. I will tell you, our deposit taking is outstanding. We spoke about a gain, basically 75 units in the quarter from [low 1 to 4-1]. We've grown since then. Our trends look very good. Obviously, you never know with attrition, you know, there can be a weak area there. The [lagger] in the sequential occupancy actually was interesting, really resulted from a larger number of deaths, so first week of November 2015, that kind of transferred over. But as I said at the fourth quarter call, we had outstanding last week of 2015. We're really excited about where we are thus far in the year. And having a weaker flu season and mild winter really positions us extremely well for the rest of the year because we're starting the second quarter at a much higher level than we saw in 2015 or in 2013.

But enthusiasm is pretty widespread. The things we speak about that differentiate Capital Senior Living are coming through very clearly in our results. And that's because of the quality of our talented staff that serve our residents so well, and the reputation that we have as a company, and the culture. Tenure is an important distinction of our Company. We have executive directors that we just gave stock awards to, who have been with the Company for more than four years. 75% of those executive directors were executive directors with Capital Senior Living in 2010. A number of them have been promoted to a regional level. But those EDs, their tenure with our Company is 12 years, and that is something that resonates with our residents, with our families and in our markets. And, as I said, we're very optimistic about continued successful improvement in occupancy. And the rate that we saw that pushed the improvement in the first quarter results was the effect of the rate increases we implemented in the fall and again in January both on actual street rents, in-house rents, and level of care fees.

Great. Shall we still think about 2.5% pricing for the year the way you were kind of talking about it before?

Yes. I mean, there are some markets where we're weaker and we'll do some discounting in some select markets. But overall we're showing really 3.5%. On a like-kind basis, we were up above 3%. Our independent living rents this quarter were up 3.6% year-over-year, so we're getting a lot of improvement there. But, again, it's a balance. There are some markets that were below 85% and, as I said, we'll have some introductory specials and do some things to move those, so that will balance out that rate growth to that kind of 2.5% to 3%. I think that is a reasonable target for your model.

Great, thanks.

And next we'll go to Brian Hollenden with Sidoti.

How many conversion and refurbishment projects are currently underway in terms of units? When are the units coming back online and what is their annualized CFFO impact?

Okay. So, the conversions, we have 400 units that we have completed, actually, 500 that we've completed now. We did 400 first, in the first tranche, and then an additional 100. And then we have another 200 we are working on in 2016. The original 400 will contribute about $0.20 per share to CFFO. Once they're fully completed and leased up, the 100 that we did in the last part of 2015 will add about $0.03 per share. They are more incremental in variety, where there is already an independent living resident in a unit, but as that independent living resident moves out, we'll add in -- we'll move in an assisted living resident in their place. And then in the 200 for 2016, those will add about $0.05 of CFFO. And, again, they're more incremental in variety. As far as the timing of that, the 400 units, we're kind of on an annualized basis right now at $0.08 per share in the first quarter of 2016. That will grow through the year. I think probably for the year we expect somewhere between $0.08 and $0.10 of contribution from those conversions for the full year in 2016, which would be about $0.06 to $0.08 incremental from 2015. And then the 100 probably will not impact us until the very end of 2016, more in 2017. And then the 200 will be certainly more in 2017 and into the first part of 2018. So, hopefully, that helps, Brian. Did that clear that up?

Yes, thank you. And then one final question and I'll jump back in the queue. With things -- same occupancy at 88.5% at the end of the quarter, where do you see occupancy at the end of 2016?

Well, we said 100 basis points for the year. The ending occupancy at the end of last year was 88.9%, so we should be right close to 90% mark, is where our goal will be to end the year in 2016, Brian.

Okay, great. Thank you.

Our next question will come from Ryan Halsted with Wells Fargo.

So, I wanted to go back to the occupancy trends across the quarter. Obviously, the flu or lack thereof was a big focus. I was hoping you could maybe break out how the flu impacted you guys, I guess over each month. Did you see it pick back up later in the quarter?

Actually, I don't know of any flu impacting our occupancy at all during the quarter. In fact, I asked today the regionals if they were not aware of any. So, there may have been some flu but it was not anything that we saw that affected occupancy at all during the quarter. I mean, we serve a chronic older senior. There is always attrition, that is part of our business. The first quarter was fairly typical of what we would see. The comparison that we show improving is where we had a very active flu the prior year, where we had the loss. So, as I said, same period, we're up 115 same store units in occupancy, and that's a gain of 75 this year versus a loss of 40 last year, which was flu-related.

Great. And then you mentioned that obviously set you up well for the rest of the year, and I guess where I was going with my question is, can you talk about your average monthly rent growth for the in-place residents? I guess with the lower attrition, how should we think about your average monthly rent growing over the course of the year without having to consider some of those incentives, or using less of those move-in incentives on that higher occupied community?

Well, first of all, in September of 2015, we increased market rents by 3% on all communities with occupancies with 93% or greater. That's about 60% of our portfolio. We also increased market level of care fees for assisted living residents by 10% on September 1, and in-house 10% October 1. Then on January 1, 2016, upon the renewal of leases for our in-house residents, they will see a 3% increase in their rents. And market rents, or street rents, increased by 3% effective January 1. So, we're seeing that. Whether we have another price increase later this year will be determinant by the occupancies. There is probably a dozen properties out of 126 that we feel that we would look to create some stimulus in occupancy by some short-term discounting or specials. That's about 10% of the portfolio. But the other 90% of the portfolio should receive a 3% rate increase both on level of care fees and market rents and renewal rates this year. To the extent that we might be able to do a little better in more highly occupied buildings, that's a possibility but it's not budgeted.

That's helpful. On your CapEx, even adjusting for the amount that you expect to receive from your REIT partners still seem to trend a little bit higher in the quarter. Just curious how you feel about your CapEx targets for the rest of the year?

Yes. So, yes, it was higher in the first quarter. We've got a lot of the projects that are really in process right now in the first. In the second quarter and the third quarter will probably somewhat similar depending on the timing of projects and kind of when they're completed. But then it will begin to moderate in the fourth quarter, and certainly into 2017 that CapEx will moderate. So, the $13.8 million in the first quarter includes the things we are doing on our leased properties as well, but we expect reimbursement for. So, that includes all communities, not just our own communities, so it's maybe somewhere around $40 million to $45 million in 2016 all told. But then we will get some reimbursement as well, which will also show up in a separate line on our cash flow statements. You may notice there is a new line on there called lease incentives, and that is where the reimbursements come through.

And this is a focused strategy that has limited duration, Ryan. What's interesting, we're already talking about in 2017, second half of the year, what we could do with that excess cash that we won't be investing in CapEx. So, we think it's really helpful. Obviously, our trends are really positive. The trends are demonstrating improvements in rate and occupancy because of newly renovated and repositioned properties, but it's part of -- it's a strategy that we undertook over the last year because we had the cash to do so, and we think it's timely to do so for our residents. But, again, that will probably burn off next year and get ratably lower throughout the first half of 2017, and then we'll go back to a much more standardized CapEx and hopefully even a lower CapEx needs. Because some of these buildings have been renovated, they really won't need much CapEx for a number of years.

The other point I'll make about our CapEx on acquisitions, because we're buying properties in very good condition and new, their CapEx needs are lower. So, again, this is a focused strategy of looking at ways we drive shareholder value in addition to our acquisitions, but the repositioning, conversions and renovations, and there is a fixed term of when this will occur, and then we'll have the benefit of the excess cash for other corporate uses or shareholder uses.

Great. And how about the flip side of that strategy. I guess, do you have any initiatives underway rationalizing your portfolio or reevaluating kind of the cash generation of some aspects of your portfolio and maybe considering divesting some or other ways to maximize cash flow?

Ryan, we do that every month as a management team. We do an analysis every quarter. We sold five buildings last year. We talked about it; we got $26 million of cash. I am pleased to say there is nothing in our portfolio that we are looking to sell, because we think that they are in good markets, good performers. OR will be improved with the CapEx that we're spending on repositionings that will generate sustainable strong cash flow to our Company. But we analyze that every year. You know what's funny? Every dollar we invest in CapEx, we ask the question what other uses can we make of this cash and what are the returns? And we have models for every property, and we look at the returns on those investments compared to acquisitions or other uses. And if we can't generate a return -- in fact, some projects we've skinnied down because we didn't feel the returns were attractive compared to alternative uses of capital. So, we're very careful in how we allocate the capital. We're very thoughtful and we're very mathematical, and I am very pleased to say that we have a really good portfolio and there is no pruning necessary at this time.

Okay, great. Maybe one last one for me. Just a question on your lease portfolio. Can you just remind me, is there a portion of your leases that there may be an opportunity to buy out or to exit in the near future?

Nothing contractual, but that's not to say that the REITs aren't looking for ways to get cash, and they're very vocal about disposing of assets. So, there may be opportunities, but there is nothing contractual.

Okay, thank you.

We'll now take our next question from Marc Cohen from MTC Advisers.

Good afternoon. It's actually Todd. Anyway, I'm a little bit confused on a couple comments that have already been made, so I'd just like to try and get some clarity on that. So, Carey, the bridge that you walked us through on the fourth quarter call, I thought that kind of got us to about the number that you actually did generate here in the first quarter. Is that correct, or what actually was that number that you guided us to?

I guided you to being about $0.38 to $0.39, is where it would have been, but we ended up at $0.41, so we ended up a little bit better than that.

Okay, good. And then, Larry, I thought I heard you say that you expect increased occupancy by about 100 basis points. Last year you indicated was 88.9%, and I think you said we'd end this year at 89%.

Well, I said about 90%, 89.9%, or about 90%, Todd.

Okay, great. Got it, good. And then when I look at resident capacity and unit capacity, can you -- what is the difference there? Is it just the number of units that are out of the loop right now from inversions and buildings that are shut down?

The definition is different for units for resident capacity. Unit capacity is doorknobs. It's the number of doors in a building. Some of those doors have units that could have shared suites, so there we have two beds in a suite, for example, so we have a husband and wife. About 10% of our residents are couples. So, the resident capacity will take into account those units that have more than one occupant. So, the resident capacity is the number of residents that can live in the community, whereas, the number of units is the actual physical number of doors that we have in the community.

And so what would you say, how much in resident capacity do we not have in inventory right now?

We have about 120 units out right now. We have 70 units at Amberleigh, which is a property up in Buffalo that is going through a major repositioning/renovation, adding assisted living. We have 30 units out at Georgetowne in Indiana, again going through an IL to AL memory care conversion. Trumbull has 10 units for memory care under construction right now. Veranda has 45 units that are out, coming back in. Very well occupied. Those, again, opened in July and are leasing up. So, those are 120 units. In addition to that, Todd, we have the full buildings of Canton Regency and Towne Centre. Those collectively have about 500 units. Those with the CTRCs will be closed to skilled nursing. Canton has opened its memory care, looks great. It's leasing up right now. And those will come back in over the next year or so. So, looking at units in total, we're talking about somewhere around 770 units out of service, two of which are complete buildings and the other are wings or units within about three or four buildings.

So, then, I'm assuming there are some units here that have more than one occupant. So, if the number of residents that we're kind of locked out of right now, like between 750 and 1,000, or 750 and 900?

It's probably -- I'm going to guess it's probably over -- probably another 825, 850, about 10%.

About 10%, about 10%.

Okay, great. And then on the -- so you're saying CapEx will be running about $13 million per quarter?

For the first three quarters, and then it will probably moderate a little bit in the fourth quarter is what we currently project, depending on the timing of the process.

Okay. So, I guess my question is, is cash less restricted is about $31. We've got to come up with $18 million in the quarter for the $74 million acquisition. So, that leaves us with about $13 million at the end of the quarter without cash flow. So, it looks like we're going to end the second quarter with cash significantly below where we are now.

Except that we own the real estate and we are scheduled to have supplemental financing on appreciated assets come through in the second quarter, third quarter (inaudible) --

You didn't discuss that -- you did, okay. So, how much do you think you'll be able to pull out in the second quarter?

We have not disclosed that, but we are confident that we will have more than enough cash to spend on all the projects. I don't feel comfortable giving the numbers because we don't have the exact numbers right now, and have term sheets with our lenders, but they are being underwritten. But we are confident that we have sufficient cash. In fact, one of the analysis we review every month is a day-by-day cash projection for the next six months that take into account everything we're speaking about. So, we do have the ability with the supplemental financings. I think our cash flow statement when we filed the 10-Q, we were generating $15.7 million of cash flow from operations this quarter, so that's annualized over $60 million. And then we have, again, financing some supplementals that should be more than be sufficient cash to take care of these needs, as well as the reimbursements from the REITs on the CapEx that is being done on the buildings that they own.

Right, right. Well, it's tough to get a number when it's difficult for you to actually give us those numbers. Don't get me wrong, I mean, almost $140 million in acquisitions in the first two quarters is awesome. I just was a little bit concerned about the firepower you'll have in the third quarter to do a significant number. Maybe it will come in the fourth quarter, I don't know. Anyway, that's got it for me. Thank you.

(Operator Instructions) And our next question comes from Dana Hambly with Stephens Inc.

Hey, guys, this is Jacob on for Dana. Really quickly, on the pickup of M&A, are there any common themes for these properties coming to the market on the seller side, or do you think this is more just a function of greater appetite on your part?

You know what? We've always had a very robust pipeline. I'm not sure there is anything unique about the market. The difference is we're looking at larger properties, larger transactions. So, I think that's just maybe our appetite has changed a little bit, or our focus. When we started doing acquisitions, we bought some $5 million, $10 million properties. We no longer even look at those. So, we really have sharpened our focus on higher quality, larger units, so that the gross dollar volume goes up. But the number of -- you know, I mentioned, for example, the number of properties we signed CAs for, those CAs only totaled, I think 18 in the quarter even though they represented, I think, 70 properties. So, it's a function not just looking at larger opportunities because we feel we have the ability to do so, and they have proven to really generate stronger sustainable cash flow as well as the ability to have future supplemental financings as those cash flows grow.

Great. And then one last one. Larry, you mentioned use of the cash when the CapEx normalizes. I'm assuming M&A is the first priority, but just checking, did you guys repurchase any shares during the quarter?

We did in the first quarter, yes, but those are ones we already announced on our fourth quarter call, but we did have 144,315 shares that we did repurchase at a weighted average price of $17.29 in the first quarter.

Great. That's it for me. Thanks, guys.

And at this time we do have a follow-up from Todd from MTC Advisors.

Yes, guys, just one last question. So, generally speaking, is the third quarter -- how does the third quarter compare to the second quarter, and how does the fourth quarter compare, generally?

Generally, the business gets better throughout the year. So, the trajectory usually is up from here. The difference is we did have a harsh first quarter, weather or flu, so we're starting at a better pace the second quarter. But I would say that in this industry, as the weather improves, there is more shoppers out there, there is more traffic out there. So, I would expect that -- and Carey gave some indications and Joanna mentioned about percentage increase in cash flow that we're guiding to for the second quarter, and we expect to see sustainable growth over that in the third and fourth quarter.

Todd, you always have to consider what's happening with expenses, because utilities are a major cost for us in the third quarter they're always -- second quarter is the mildest quarter, so the third quarter will be higher and the fourth quarter will be a little higher than that from a utilities standpoint. And then you've got, every now and then, the number of days. For instance, the third quarter will have 92 days versus 91, and that always makes a little bit of a difference for us. So, kind of factor some of those things in as well as you're looking at the third and fourth quarters.

Great, thanks.

And at this time I show no further questions in the queue. I'd like to turn the conference back over to our presenters for any additional or closing remarks.

Well, again, I want to thank everybody for today's participation. As always, we look forward to seeing you at various conferences over the next number of weeks, and feel free, if you have any further questions, to call Carey or myself. We are always open for conversations. Have a great evening and, again, thank you very much for your interest in Capital Senior Living. Goodnight.

That does conclude our conference for today. Thank you for your participation.